Euro-Area Inflation Accelerates After String of Upbeat Data

“Inflation in the euro area accelerated more than forecast and a core measure jumped the most in nearly a year, capping a week of encouraging data for the European Central Bank.”

“Consumer prices rose 1.7 percent in April from a year earlier — the strongest number since November. The narrower inflation gauge that strips out volatile components such as energy and food came in at 1.2 percent, a six-month high, surging from 0.8 percent in March. Both readings beat economist estimates.”

“The pickup in inflation — a key metric for the ECB’s monetary policy — comes just days after a report showing the pace of growth in euro-area economy unexpectedly doubled in the first quarter amid a surge in Spain, resilience in France and a rebound in Italy. That should make additional stimulus less urgent, with policy makers already expressing some confidence that the economy is stabilizing. Bund yields turned positive at the start of the week and have kept rising each day as the economic data improved.”

“Bundesbank President Jens Weidmann on Thursday touted Germany’s excellent labor-market situation and rising incomes as a source of strength for private consumption that should tide the economy over its soft patch. He also urged the ECB to press ahead with its exit from unconventional monetary policy if inflation allows.”

“The pickup in price growth may have been partly driven by temporary factors that are likely to unwind in May. Germany data earlier this week showed inflation accelerated at the fastest pace in five months in April on the back of surging cost of package holidays — a side effect of Easter holiday that came later than last year.”

“The reading for core inflation now matches a ceiling it hasn’t breached in two years, underlining the struggle for the ECB to achieve sustainable increases in consumer prices.”

As we can see from the article, the consumer prices rose 1.7 percent in April from last year and the inflation also increases form 0.8 to 1.2. Inflation refers to a continuing (or sustained) increase in the general price level. The increase in inflation will lead to many consequences.

Firstly, losses occur for holders of cash, for savers, for lenders, and for people receiving fixed incomes or wages, because the real value of their money falls. However, gains occur for borrowers and payers of fixed incomes or wages because the real value of their payments falls. In addition, increase in inflation may result increased inequality in income distribution, as the wealthy who are in a better position to make investments in assets with rising prices (ex real estate, gold) gain relative to lower income groups, which is the poor.

Secondly, firms cannot accurately predict future revenues and costs of production because of the inability to predict future prices and price level changes. Therefore, inflation will have a negative effect on investment and economic growth. Both the consumer and business confidence will decrease as they don’t want to spend their money. Moreover, if savers do not receive a high enough rate of interest, they will face a loss on their savings and their incentive to save is reduced. Furthermore, high rates of inflation mean that firms must continuously print or publish new menus, catalogues, price lists, price labels, and price advertisements, which increase their costs of production. There will also have damage to export competitiveness. High inflation means that a country’s exports become more expensive to foreigners, and therefore are likely to fall, while imports become more attractive as they are cheaper relative to domestic goods. As net exports fall, AD decreases, putting a downward pressure on real GDP. A trade deficit may be created or increased, putting a downward pressure on the value of the currency.